Coronavirus vaccine hope signals shift from tech stocks towards market laggards

As the dust settles on the US election, investors’ attention is returning to market fundamentals. Economic growth and corporate earnings will take the place of politics as market drivers. The Covid-19 economic downturn has been unlike previous recessions caused by factors such as debt bubbles, and has continued to weigh on economic activities and corporate earnings in most sectors. Medical solutions, particularly breakthroughs in vaccine development, have become the determinant of stock market performance. Amid the dramatic rally from the nadir in March, performance has diverged between sectors. Technology and health care companies were the major contributors to the resurgence, given the greater confidence in their corporate earnings during the pandemic. However, many other sectors have not reclaimed their losses as their corporate earnings remain depressed. This has started to change in the past two weeks as a string of good news regarding vaccine development has come to light. The high effectiveness of those vaccines has inspired hope that the pandemic can ultimately be conquered, with economic and social activities eventually returning to normal. Consequently, the 10-year US Treasury yield jumped 10 basis points to 0.92 per cent on November 9, prompted by the prospect of recovery in the medium term. Investors have waited a long time for news of a vaccine breakthrough. This has been seen as a catalyst for a sector rotation within equity markets, meaning that different types of stocks will come into or out of favour. The rationale is that, in a full-scale economic recovery, corporate earnings will also normalise in those sectors that have been worst hit by the pandemic, such as airlines, travel, retail, energy, financials and raw materials. As their earnings rebound, the price of these companies’ stocks will look more attractive as they are not very expensive now. On the other hand, demand for technology products and services could slow if the pandemic is under control and employees gradually return to their offices. Why big tech will remain the safest bet in a post-Covid-19 world Driven by such expectations, the sectors that were lagging behind experienced a strong rally in the past two weeks while technology stocks underperformed. The Dow Jones Industrial Average, composed mostly of traditional sectors in the US equity market, rose 5.2 per cent while the tech-stock-heavy Nasdaq was almost unchanged from November 6 to 17. The performance gap between the technology sector and those pandemic-hit sectors should continue to narrow as more clarity on vaccines becomes available. Similar to the US equity market, a rotation is also happening across other regional markets for the same reason. Europe has been a laggard in the previous months, but has outperformed the United States in the past two weeks, as seen in the 8.3 per cent rally of the STOXX 50 from November 6 to 17. In Asia, some previously unloved equity markets such as Japan, Southeast Asia and India also look to be playing catch-up. After such a significant rotation, it would not be unusual for stocks to reverse their price trend for a while as investors take time to digest the news and wait for the next signal for action. Admittedly, there is still a long way to go before the pandemic is fully contained. More vaccine tests are required and more time is needed for the approval process despite efforts to expedite procedures. Even after that, there are still manufacturing and distribution issues, which means an effective vaccine is still months away from mass deployment. During this period, the market will fluctuate with the news cycle. The market’s reaction to the positive vaccine news in recent weeks shows a medical solution to the pandemic is an important catalyst for a stock rotation towards laggards such as travel, energy, commodities and financial companies. As the global economy gradually recovers over the next year, and as medical solutions potentially accelerate that recovery trajectory, riskier assets such as equities, corporate credits and Asian fixed income are most likely to benefit from this early-stage economic rebound. As the recovery finally takes hold, stock markets in Europe, emerging markets outside Asia, and Japan might finally get a chance to shine. Chaoping Zhu is a Shanghai-based global market strategist at JP Morgan Asset Management